HMRC wants every contractor and subcontractor to check for signs of labour fraud in construction before they take on a supplier of labour, pay a subcontractor, or sign up to a payroll scheme that looks a little too generous. The short version: if a deal on labour looks cheaper than it should be, and the paperwork behind it is thin, you could be pulled into a fraud that leaves you owing tax, penalties and interest, even if you did not set it up.
This is not just about protecting HMRC’s revenue. Under the Criminal Finances Act, a business can be held responsible for failing to prevent the facilitation of tax evasion by people connected to it, including labour suppliers. So the checks below are partly self-defence. This article explains what labour fraud looks like in the trades, the warning signs HMRC asks you to watch for, and the tools that make verification part of your normal routine rather than a panic before a VAT return, including knowing which VAT scheme applies to you.
What “labour fraud” actually means on a building site
Labour fraud is an umbrella term for schemes that dodge the tax and National Insurance that should be paid on wages. In construction it usually shows up in one of a few forms:
- Mini-umbrella company (MUC) fraud. A workforce is split across dozens of tiny limited companies, each with a handful of workers. The point is to abuse reliefs meant for genuine small employers, such as the Employment Allowance, and VAT scheme thresholds. Workers often have no idea which company technically employs them.
- False self-employment. People who are, in reality, employees are treated as self-employed subcontractors to avoid employer National Insurance and holiday pay.
- Non-payment of PAYE and NIC. A labour provider deducts tax from workers but never hands it to HMRC, then dissolves the company.
- VAT fraud. A supplier charges VAT on labour, collects it, and vanishes before paying it over. The domestic reverse charge for construction was introduced partly to close this off.
You do not have to be the one running the scheme to get hurt. If you are a main contractor paying a labour agency, or a subcontractor being placed through an umbrella company, HMRC expects you to have done reasonable checks. Get it wrong and you can lose the right to reclaim VAT, face a bill for tax that should have been deducted, and end up named in an enquiry.
Where the Construction Industry Scheme fits in
The Construction Industry Scheme (CIS) is HMRC’s system for handling payments between contractors and subcontractors. If you are a contractor, you must verify each subcontractor with HMRC before you pay them, then deduct 20% (registered), 30% (unverified) or 0% (gross payment status) and pass it on. Getting verification wrong is one of the most common ways a small firm drifts into a problem, because the wrong deduction rate is itself a red flag to HMRC.
CIS status is closely tied to whether someone is genuinely self-employed. If you would like the full picture on the employment side of that question, our guide to hiring your first employee in the UK covers the difference between an employee and a contractor, and the new day-one employment rights that change how you should treat regular workers.
The warning signs HMRC asks you to check
HMRC publishes guidance specifically headed “Check for signs of labour fraud in construction”. The recurring theme is that fraudulent labour supply chains leave a trail. Watch for:
- Rates that undercut the market for no clear reason. If a labour provider can supply workers far cheaper than everyone else, ask how. Often the answer is unpaid tax.
- Frequently changing companies. Workers moved between a rotating cast of limited companies, or invoices arriving from a different entity each month, are classic mini-umbrella signals.
- Short company histories. A supplier incorporated weeks ago, with a director who has run several dissolved companies, deserves scrutiny on Companies House.
- Odd registered addresses. Dozens of unrelated companies at the same accommodation address, or overseas directors appointed then quickly resigned.
- Vague or missing paperwork. No contract, no clear employer named on payslips, workers unsure who pays them, or no valid VAT number to check.
- Pressure to route payments oddly. Being asked to pay a third party, split payments, or use an unfamiliar umbrella company for your own subcontractors.
None of these on its own proves fraud. A brand new company is not automatically dodgy. But two or three together are your cue to slow down and verify before money moves.
The checks worth building into your process
Good checks are boring and repeatable. Before you take on a labour supplier or a new subcontractor, run through the same list every time:
- Companies House. Free to search at Companies House. Check incorporation date, registered address, directors and their other appointments, and whether accounts and confirmation statements are up to date. Note that directors now face new checks under the rules we covered in Companies House identity verification.
- VAT number. Verify it on the government’s Check a UK VAT number service. If you are in construction, make sure you are applying the domestic reverse charge correctly, which our explainer on VAT registration and schemes touches on.
- CIS verification. Verify every subcontractor through HMRC before the first payment, and keep the verification reference.
- Right to work and identity. Confirm each worker’s right to work and identity, and keep dated evidence.
Software and services that make verification routine
Most trades already run accounting or payroll software that handles CIS deductions and returns. The main options UK contractors shortlist are Xero, QuickBooks, Sage and FreeAgent, all of which can file CIS returns and verify subcontractors with HMRC. Worth knowing beyond the big names: BrightPay, an Irish and UK payroll product popular with accountants for its CIS and RTI handling, is one many owner-managers have never heard of but should.
Identity and right-to-work checks are a separate job, and there are strong British specialists here rather than a single obvious tool. Yoti, TrustID and Amiqus all run digital identity and document checks that produce a dated audit trail, which is exactly what you want to show HMRC or an auditor later. Naming these matters because a paper photocopy in a drawer is far weaker evidence than a timestamped verification record.
| Check | Tool or service | What it does | Typical cost |
|---|---|---|---|
| Company background | Companies House | Directors, filings, addresses, dissolutions | Free |
| VAT number | gov.uk VAT checker | Confirms a VAT number is valid | Free |
| CIS deductions and returns | Xero, QuickBooks, Sage, FreeAgent, BrightPay | Verify subcontractors, apply the right deduction rate, file returns | Monthly subscription, often from around £15 to £40 depending on features |
| Identity and right to work | Yoti, TrustID, Amiqus | Digital ID and document verification with an audit trail | Usually priced per check or per month; request a quote |
The pricing above is indicative and changes often, so treat the tool websites as the source of truth before you commit. The point is that the free checks cost nothing and the paid tools cost less than a single day of a labourer’s wages, which is trivial next to the tax bill a bad supply chain can trigger.
A realistic example
Say you run a groundworks firm and a new agency offers ten labourers at a day rate noticeably below your usual supplier. You check Companies House and find the agency was incorporated two months ago, the sole director resigned from three dissolved companies last year, and the registered address hosts forty other companies. The VAT number is valid but very recent. That is enough of a pattern to walk away, or at least to ask hard questions and get everything in writing before you place a single worker. Ten minutes of free checking has protected you from a supply chain that could later leave you unable to reclaim VAT and facing a CIS enquiry.
Frequently asked questions
Am I liable if a labour supplier commits fraud without my knowledge?
You can be. HMRC expects reasonable due diligence on your supply chain, and the failure to prevent facilitation of tax evasion offence means a business can be liable if connected people help evade tax and you had no reasonable prevention procedures. Doing and recording the checks above is how you show you took it seriously.
What is mini-umbrella company fraud in plain terms?
It is when a large workforce is deliberately fragmented into many tiny companies so each can wrongly claim reliefs and thresholds meant for genuine small employers. Workers are often shuffled between companies and may not know who actually employs them. It is one of the patterns HMRC most wants contractors to spot.
Does the CIS mean I do not need to worry about employment status?
No. CIS covers how you handle payments to subcontractors, but it does not decide whether someone is genuinely self-employed. Treating an effective employee as a CIS subcontractor to save on National Insurance is exactly the kind of false self-employment HMRC challenges.
How long should I keep verification records?
Keep CIS records, VAT evidence and identity checks for at least the periods HMRC requires for tax records, which is generally several years. Digital tools that timestamp checks make this far easier than a filing cabinet.
Where can I read HMRC’s official guidance?
Search gov.uk for “Check for signs of labour fraud in construction” and the linked CIS and reverse charge pages. Those are the authoritative sources; this article is a practical summary, not a substitute for them.
What to do next
- Write a one-page check list covering Companies House, VAT, CIS verification and right to work, and make it mandatory before any new supplier or subcontractor is paid.
- Turn on CIS handling in whatever accounting software you already run, whether that is Xero, QuickBooks, Sage, FreeAgent or BrightPay, so deductions and returns are automatic.
- Trial a digital identity tool such as Yoti, TrustID or Amiqus so your right-to-work checks leave a proper audit trail rather than a photocopy.
- Review the wider picture if your firm is growing, from funding equipment to the tools in the operations stack every sub-£1m business should know about, so compliance sits alongside the rest of your systems.
